Armenia Competitiveness Fund Preliminary Report: Summary of research to-date and design thoughts : Armenia Competitiveness Fund Preliminary Report: Summary of research to-date and design thoughts Prepared for Discussion Purposes
by Aslan Global, Inc.
September, 2005
The Competitiveness Imperative : The Competitiveness Imperative Competitiveness has emerged as the leading framework for the economic development of nations
Originated with Professor Michael Porter
Led President Reagan’s Economic Competitiveness Council
Founder of The Monitor Group, inspiration
Strategy advisor to dozens of nations, both developed and developing
Created Institute for Strategy and Competitiveness at Harvard
Kaia Miller
10 year ongoing collaboration with Professor Porter and his Institute
Monitor, Onthefrontier, Aslan Global
Direct experience in El Salvador, Venezuela, the Middle East (Palestine, Israel, Jordan, Egypt), Rwanda, Bangladesh, Mozambique, Nigeria, Romania, Zambia, Dominican Republic, Brazil
4 years active participation in Armenia, Armenia 2020
McKinsey Global Institute
Premier advisor to nations on competitiveness
Working in Armenia, Armenia 2020 since 2002
Completed assessment of sector productivity, detailed analyses of IT and Tourism, additional sectors ongoing
Porter/Miller and McKinsey provide world-class foundations to develop the Armenia Competitiveness Fund strategy
Agenda : Agenda The Challenge
The Case for an “Armenia Competitiveness Fund”
What is Competitiveness and How Is It Created?
Why a Competitiveness Fund Makes Sense Now in Armenia
The Vision for the “Armenia Competitiveness Fund”
Critical Design Issues for the Armenia Competitiveness Fund
Discussion and Recommendations
Lessons Learned from Other Initiatives
Selected Armenian Initiatives
Selected non-Armenian Initiatives
“Armenia Competitiveness Fund” The Challenge : “Armenia Competitiveness Fund” The Challenge There are dozens of channels through which funds and support are flowing to Armenia and being used in various aspects of development, some more effective than others.
Diaspora, development agencies and donors, other foreign investors, Armenian government
In recent years among most donors and philanthropies there has been a trend away from humanitarian only support to include economic development support, particularly support for private sector enterprise development
The current efforts are not linked to any national vision or economic development plan and are insufficient to achieve the dramatic increases in productivity and prosperity that Armenians both in Armenia and in the Diaspora, desire.
There is little coordination among the disparate sources of support and the hundreds of projects underway
Even “successful” efforts are realizing only incremental results
There is an emerging sense of urgency among wealthy Diasporans to devise an economic development strategy with a strong focus on business development that will have real, dramatic and sustainable results.
Wealthy Diasporans who have contributed significant funds want to have confidence that Armenia will have the support it needs longterm. They want real impact and regenerative investments.
The central challenge is to develop an effective mechanism to pool external funds and other forms of support, link the mechanism to a sound, comprehensive, national economic development strategy embraced by relevant groups in Armenia, and achieve dramatic and sustainable results
Desired results would focus on creating truly successful companies, attractive jobs in Armenia, and ultimately prosperity creation consistent with the ambitious levels articulated by Armenians in the Armenia 2020 visions.
Slide6 : THE WELL - BEING OF ORDINARY ARMENIAN CITIZENS WILL VARY EVEN MORE PRONOUNCEDLY DEPENDING ON THE CHOSEN PATH Average nominal monthly salary, USD 2003 2020 50 100 600 200 400 Paraguay model: No change for better • Average people barely make their basic ends • Unemployment is pervasive, especially in rural areas • Quality of education deteriorates • Population emigrates massively 60 60 Paraguay model: No change for better • Average people barely make their basic ends • Unemployment is pervasive, especially in rural areas • Quality of education deteriorates • Population emigrates massively 60 60 Israel model: Living like in a backward Russian province • Average Armenians work in small factories and shops • Some middle class emerges, mainly in Russian - owned industries • Quality of education like in Soviet times • Best and brightest still emigrate 120 120 Israel model: Living like in a backward Russian province • Average Armenians work in small factories and shops • Some middle class emerges, mainly in Russian - owned industries • Quality of education like in Soviet times • Best and brightest still emigrate 120 120 Ireland model: Living like in Eastern Europe • Average Armenians afford buying furniture and cheap cars • Large middle class emerges, both in foreign and local companies • Quality of education moves towards European standards • Emigration is reversed 260 260 Ireland model: Living like in Eastern Europe • Average Armenians afford buying furniture and cheap cars • Large middle class emerges, both in foreign and local companies • Quality of education moves towards European standards • Emigration is reversed 260 260 460 460 Singapore model: Becoming masters of own life • Average Armenians afford modern housing conditions • Armenia becomes predominantly middle class society • Quality of education is among the best in the world • Armenians return massively from Russia 460 460 Singapore model: Becoming masters of own life • Average Armenians afford modern housing conditions • Armenia becomes predominantly middle class society • Quality of education is among the best in the world • Armenians return massively from Russia 45 45 Source: Armenia 2020/McKinsey
Agenda : Agenda The Challenge
The Case for an “Armenia Competitiveness Fund”
What is Competitiveness and How is it Created?
Why a Competitiveness Fund Makes Sense Now in Armenia
The Vision for the “Armenia Competitiveness Fund”
Critical Design Issues for the Armenia Competitiveness Fund
Discussion and Recommendations
Backup: Lessons Learned from Other Initiatives
Selected Armenian Initiatives
Selected non-Armenian Initiatives
“Competitiveness” is Productivity : “Competitiveness” is Productivity “Competitiveness” is productivity
It is determined by the productivity with which a nation uses its human, capital, and natural resources
Productivity sets a country’s standard of living (wages, returns to capital, returns to natural resource endowments)
Productivity depends both on the value of products and services (e.g. uniqueness, quality) as well as the efficiency with which they are produced
It is not what industries a nation competes in that matters for prosperity, but how firms compete in those industries
Productivity in a nation is a reflection of what both domestic and foreign firms choose to do in that location. The location of ownership is secondary for national prosperity
The productivity of “local” industries is of fundamental importance to competitiveness, not just that of traded industries
Nations compete in offering the most productive environment for business
The public and private sectors play different but interrelated roles in creating a productive economy
Source: Michael E. Porter, Institute for Strategy and Competitiveness, Harvard University Any project focused on building competitiveness is ultimately focused on increasing productivity. Labor productivity, for example, is one key indicator that should be used to measure the performance of any “competitiveness” initiative. This can be measured at company, cluster and national levels.
“Competitiveness is Productivity” National Determinants of Productivity and Productivity Growth : “Competitiveness is Productivity” National Determinants of Productivity and Productivity Growth A sound macroeconomic, political, legal, and social context creates the potential for competitiveness, but is not sufficient
Competitiveness ultimately depends on improving the microeconomic capability of the economy and the sophistication of local companies and local competition
A “competitiveness” initiative needs to have components that ensure upgrading of both company-level strategies AND of the business environment. Source: Michael E. Porter, Institute for Strategy and Competitiveness, Harvard University
Slide10 : The Microeconomic Business Environment Successful economic development is a process of successive economic upgrading, in which the business environment in a nation evolves to support and encourage increasingly sophisticated ways of competing Sophisticated and demanding local customers
Local customer needs that anticipate those elsewhere
Unusual local demand in specialized segments that can be served nationally and globally Presence of high quality, specialized inputs available to firms
Human resources
Capital resources
Physical infrastructure
Administrative infrastructure
Information infrastructure
Scientific and technological infrastructure
Natural resources Access to capable, locally based suppliers and firms in related fields
Presence of clusters instead of isolated industries A local context and rules that encourage investment and sustained upgrading
e.g., Intellectual property protection
Meritocratic incentive systems across all major institutions
Open and vigorous competition among locally based rivals
Productivity* Growth in Companies Drives the Economic Growth for the Country : Impact on economy
Higher demand
Lower prices
Higher salaries
Net jobs created
Higher investments
Higher profits
Higher demand
Higher exports
Lower unit costs
Innovative products
Surplus distributed
Customers (lower prices)
Employees (higher salaries)
Owners (higher profits) Productivity* Growth in Companies Drives the Economic Growth for the Country Greater surplus
Higher value added
Lower labor/ capital costs Productivity growth in company X While looking at economic growth opportunities for the country, we focus on labor productivity of its economic agents as the main engine for wealth generation * Productivity is defined as total value added divided by number of employees participating in value creation Source: McKinsey Report for Armenia 2020
Slide13 : Microeconomic Competitiveness and GDP Per Capita Current Competitiveness Index (CCI) Source: Porter, Michael E. “The Current Competitiveness Index: Measuring the Microeconomic Foundations of Prosperity.” The Global Competitiveness Report 2000, New York: Oxford University Press, 2000 1999 GDP per Capita* * Adjusted for Purchasing Power Parity
Slide14 : Improving the general business environment is essential, but cluster development is needed to attain middle-income levels
Developing economies should upgrade traditional clusters including agriculture, never abandon them
Recruitment of foreign direct investment should focus on existing and emerging clusters, not generalized appeals
Incentives should be weighted toward training, infrastructure, and other areas that upgrade the cluster versus general subsidies and tax holidays
Existing MNCs can become nodes for cluster development
The best way to retain companies is to make them part of a cluster to support higher local productivity
Free trade zones should be organized around clusters, and regulations designed to encourage linkages with the local economy
A formal structure for cluster development is an important component of economic development
Private sector led
Government convening and participation
Seed funding for cluster assessment and the formation of cluster-based industry groups Cluster Development in Emerging Economies Some Principles Source: Michael E. Porter, Institute for Strategy and Competitiveness, Harvard University
How Clusters Can Fit into a National Economic Development Program Example: El Salvador : National Competitiveness Program EL SALVADOR 2021 Legal Reforms / Deregulation and Facilitation, etc.
Institution building, capacity building, innovation potential, productive private-public dialogue
Social investments geared toward increasing productivity Business Climate / Cross Cluster Issues Investment Promotion Technological Capabilities Export Promotion Regional Agenda Sub-national Agenda Coffee Cluster Apparel Cluster Handicraft Cluster Emigrant Cluster Electronics Cluster Other Clusters National Plan How Clusters Can Fit into a National Economic Development Program Example: El Salvador Source: Adapted from the National Competitiveness Program in El Salvador
Slide16 : “Clusters” Include Companies, IFCs and Government
Example: The California Wine Cluster Sources: Michael Porter / Institute for Strategy and Competitiveness at Harvard. California Wine Institute, Internet search, California State Legislature. Based on research by Harvard MBA 1997 students R. Alexander, R. Arney, N. Black, E. Frost, and A. Shivananda. State Government Agencies
(e.g., Select Committee on Wine Production and Economy)
Agenda : Agenda The Challenge
The Case for an “Armenia Competitiveness Fund”
What is Competitiveness and How Is It Created?
Why a Competitiveness Fund Makes Sense Now in Armenia
The Vision for the “Armenia Competitiveness Fund”
Critical Design Issues for the Armenia Competitiveness Fund
Discussion and Recommendations
Backup: Lessons Learned from Other Initiatives
Selected Armenian Initiatives
Selected non-Armenian Initiatives
The Need for a Focus on Building Competitiveness in Armenia : The Need for a Focus on Building Competitiveness in Armenia GDP per Capita (Constant Armenian Drams) Note: CAGR represents Compound Annual Growth Rate
Source: Aslan Global Report for Armenia 2020, IMF World Economic Outlook September 2004 Armenian Real GDP per capita, 1990–2005 (2004, 2005 estimated) CAGR
1990–2003: -3.5%
1993–2003: 7.1% Although growth rates in Armenia have been impressive over the last decade, the sources of growth are unsustainable, including large infusions from the Diaspora and international institutions. To sustain the growth, Armenia must invest in supporting and creating successful companies and increasing labor productivity or “competitiveness”.
Armenia’s Recent Economic Performance A Closer Look at Recent Drivers of Growth (USD Millions) : Armenia’s Recent Economic Performance A Closer Look at Recent Drivers of Growth (USD Millions) Total GDP Agriculture Industry Retail and wholesale Transport and communication Other services USD millions 1,899 1,847 1,911 2,117 2,367 Real CAGR Percent Nominal CAGR Percent Armenia experienced robust growth, which was driven by construction, retail and services largely boosted through generous external financing
Armenia's tradable sectors performed worse than the average economy, with price deterioration resulting in almost no nominal gains in four years 7.8 3.6 7.3 23.0 12.3 5.3 7.8 5.7 -1.7 4.3 19.7 9.9 15.1 5.5 Construction 1998 1999 2000 2001 2002 * Without FDI, includes remittance, grants, concessionary lending and limited capital transfers As a percent of GDP 23.4 23.9 23.6 18.5 14.7 External financing* 1998 1999 2000 2001 2002 Source: McKinsey Report for Armenia 2020
Composition of Armenian PPP GDP, 2001 : Composition of Armenian PPP GDP, 2001 GDP at PPP,
without informal sector,
USD millions 10,618 GDP at PPP, with lower estimate of informal sector, USD millions 13,211 14,163 GDP at PPP, with upper estimate of informal sector, USD millions Agriculture Energy and utilities Mining and Metals Construction materials Chemical Industrial machinery Electronics and precision Jewelry and diamonds Food processing Textile and apparel Other manufacturing Construction Retail and wholesale Tourism (Hotels/restaurants) Telecom Transportation Banking and insurance IT/Software/Scientific research Other professional services Personal/communal services Health care and social services Education and culture Government and defense Total Armenian economy is heavily dominated by six basic sectors-agriculture, energy, food processing, construction, retail and personal services
Tradable and higher value-added services sectors are weak, which results in lower quality of total output and limited wealth creation
For the same reason, pricing level in economy is depressed: real economy, at PPP prices, is estimated to be 5 times larger than the nominal one: without structural improvements, the discount will persist in the foreseeable future Sectors Source: McKinsey Report for Armenia 2020; Armenian Statistics Yearbook 2001; IMF; interviews, team estimates
Armenia’s Recent Export Performance USD Millions : Armenia’s Recent Export Performance USD Millions * On a net basis, given that the industry performs only intermediate processing
Source: McKinsey Report for Armenia 2020; IMF,Armenia National Statistics Service, 2002 183 161 197 247 294 Nominal CAGR Percent Armenia's export sector outperformed the rest of the economy; however its share is still rather small
2 segments – diamond and food processing – accounted for more than 70% of export growth since 1998
In terms of impact on economy, export revenues, although growing, are still behind external financial assistance 12.6 60.1 34.6 16.0 3.0 7.0 3.4 1998 1999 2000 2001 2002 Exports as percent of GDP 9.6 8.7 10.3 11.7 12.9 Exports as percent of external assistance 41.1 36.7 43.7 63.0 84.5 Total exports Precious stones and articles* Food products Textile and apparel Base metals Mineral and chemical products Machinery and equipment Other -6.9
Increasing Focus on Economic Development Among Donors, but Lack of National Strategy and Coordination : Increasing Focus on Economic Development Among Donors, but Lack of National Strategy and Coordination Early focus in many organizations on humanitarian relief has given way to increasing focus on economic development
Ex: USAID and CAPS $17-20mm “Competitiveness” Project focused on clusters and business environment
Armenia 2020 focused on economic development, including cluster development
Increasing interest of organizations such as AGBU and Assembly to support economic development oriented activities
Dozens of organizations are contributing to Armenia’s economic development, but there is little coordination of strategies and activities, and lack of leadership from within Armenia, particularly from the Government
Plans for a national economic development plan have fallen short of expectations
UNDP oversees foreign donor coordination efforts which are reportedly weak
The number of local NGOs has increased exponentially since independence, but activities often focus on fund-raising rather than economic development
Several attempts have been made to start programs focused on company-level support, with mixed results
Attempts now defunct
Lincy SME Loan Programs
Armenian SME Investment Fund (w/IFC)
Programs still in operation:
Armenian Business Corporation 1994 (w/revised business model and significantly reduced in scope after bankruptcy in 1999):
Izmirlian-Eurasia Small Business Loan Program 1995
BSTDB-IF JV Financing Facility
Little specific focus on improving clusters or the business environment
Some preliminary analyses done by Armenia 2020 through McKinsey
No formal Cluster Working Groups formed to-date, although this will be a key component of the CAPS program
Government has / has had active role in only a few cases
Lincy Foundation donations to government-sponsored infrastructure projects
Increasing Focus on Economic Development and Companies, but Gap in Clusters and Microeconomic Environment : Increasing Focus on Economic Development and Companies, but Gap in Clusters and Microeconomic Environment
Emerging Focus on Industry Cluster Development in Armenia : Emerging Focus on Industry Cluster Development in Armenia A Beginning
Increasing awareness / visibility of clusters and competitiveness in Armenia over the last several years
Government and USAID recently initiated a cluster program as part of the CAPS Project
Several “cluster projects” expected
Armenia 2020 initiated strategic analyses of the business environment and several clusters
Tourism completed; jewelry, healthcare and others proposed
Future Priorities
Link programs focused on companies to cluster development
Include a robust cluster development program as part of a comprehensive national economic development strategy linked to an articulated, ambitious vision
Training for cluster members, facilitated strategic processes, targeted investments by companies, IFCs and local and national governments
Increase local leadership and initiative (private sector and government participation in and leadership of cluster strategy development and strategic implementation)
Institutionalize the cluster process and make it open to any cluster able to organize and commit itself to a rigorous change process
Design mechanisms for ongoing Public / Private Sector Dialogue to guide investments in the overall Business Environment
Company-focused Initiatives to-Date are Insufficient to Achieve the Desired Prosperity Levels : Company-focused Initiatives to-Date are Insufficient to Achieve the Desired Prosperity Levels Failed Initiatives
Armenian Business Corporation 1994-1999: Goal: unifying the efforts of the Diaspora to assist the development of private business in Armenian and improve the social climate in the country. Activities: Loans to local businesses of which many went bankrupt leading to bad loans
Armenian SME Investment Fund with IFC—target of $15mm from Diaspora never reached
High levels of direct company support unallocated
All but $20mm of the $170mm Lincy program originally established for company support redirected to infrastructure
Small programs relative to ambitious national goals
Black Sea Trade and Development Program-Izmirlian Foundation: $4mm joint-finance facility for SMEs
Izmirlian-Eurasia Small Business Loan Program: highly successful (particularly among poultry producers), but small ($3mm Izmirlian contribution)
ABC1999-2003: New business model--Businesses willing to undertake an equity JV in which ABC was majority owner. 7 JVs: fruit / vegetable processing, gas stations, potato production, stone mining, law office
No program focused on investing in companies in targeted, high potential industry clusters or linked to an articulated national vision and strategy
Agenda : Agenda The Challenge
The Case for an “Armenia Competitiveness Fund”
What is Competitiveness and How Is It Created?
Why a Competitiveness Fund Makes Sense Now in Armenia
The Vision for the “Armenia Competitiveness Fund”
Critical Design Issues for the Armenia Competitiveness Fund
Discussion and Recommendations
Lessons Learned from Other Initiatives
Selected Armenian Initiatives
Selected non-Armenian Initiatives
The Armenia Competitiveness Fund Vision Four Primary Activity Areas : The Armenia Competitiveness Fund Vision Four Primary Activity Areas Equity/Debt Investments
Direct investments in existing private companies and start-ups in Armenia in targeted industry clusters
Management of funds to-be-invested Investment Banking Services
Mergers and acquisitions
Strategic partnerships
Potentially partner with existing investment banking firm to provide these services (e.g. Ameria, Troika Dialog) Cluster Competitiveness Strategic Advisory Services
Management consulting and support services
Talent pool
Potentially partner with existing Armenian or international consulting firms to provide these services (e.g. McKinsey) Grant Program
Direct grants for productivity growth
Cluster-level: benefit multiple companies in a cluster (e.g. industry experts, research, institutes, etc)
Regional / national level: benefit all companies (e.g. infrastructure, policy, etc.) Key objectives of the Fund are to make strategic investments to achieve rapid and dramatic growth in targeted industry clusters that will allow Armenia to achieve the ambitious levels of prosperity articulated in the Vision 2020 process. The vast majority of these investments will be direct equity investments in companies in Armenia, supported by critical related services: strategic advisory services, investment banking services and a direct grant program.
The Armenia Competitiveness Fund Vision High Level 10 Year Plan : The Armenia Competitiveness Fund Vision High Level 10 Year Plan 1 9 7 8 6 5 4 2 3 10 Year Cluster Strategy Development Investments and Support Realization of Gains Growth Phase Clusters 1, 2 Cluster Strategy Development Investments and Support Realization of Gains Growth Phase Clusters 3. 4 Cluster Strategy Development Investments and Support Realization of Gains Growth Phase Clusters 5. 6 Target clusters will undergo a four-phase / 5 year development strategy: Phase One—Strategy Development; Phase Two—Investments and Support; Phase Three—Growth; Phase Four—Realization of Gains. The first 2 clusters will begin to realize gains in Years 4-5. With 2 additional clusters initiated every 2 years beginning in year 2, each subsequent year a new cluster will enter the Realization of Gains Phase. At least every 5 years, each pair of clusters will undergo a Strategy Update Exercise. By the end of 5 years, there will be 3 robust clusters realizing strong growth, and by the end of 10 years there will be 7. Strategy Update Strategy Update Strategy Update
Agenda : Agenda The Challenge
The Case for an “Armenia Competitiveness Fund”
What is Competitiveness and How Is It Created?
Why a Competitiveness Fund Makes Sense Now in Armenia
The Vision for the “Armenia Competitiveness Fund”
Critical Design Issues for the Armenia Competitiveness Fund
Discussion and Recommendations
Backup: Lessons Learned from Other Initiatives
Selected Armenian Initiatives
Selected non-Armenian Initiatives
What Are the Challenges that Could Inhibit Success? : What Are the Challenges that Could Inhibit Success?
“Armenia Competitiveness Fund” Seven Critical Design Areas : “Armenia Competitiveness Fund” Seven Critical Design Areas Interface with Contributors Financial Structure Governance Investment Strategy Support / Performance Measurement Interface with Armenian Government Interface with Other Development Players Managing the organization Coordinating strategy with other players Collecting the inputs Coordinating with ongoing projects: e.g. USAID, UNDP, World Bank, IMF, MCA, other bilaterals, Diaspora orgs., NGOs, etc Whom to target (Diasporans, international organizations? Other individuals?
Communication strategy Transparency, accountability, objectivity, trust
Organizational Structure
Hiring and Compensation Type of fund
Size / per cluster
Distributions Key performance indicators
Accountability for company performance Priority clusters
Allocation of funds among equity investments, grants, consulting and investment banking Coordinating / ensuring relevant investments in upgrading the business environment
Ongoing private-public sector dialogue
1. Interface with Contributors : 1. Interface with Contributors Fund will target interested Diasporans who share the vision of what Armenia needs to achieve its desired levels of prosperity
Consider setting minimum investment levels
Fund is open to other investors (e.g. non-Armenians, international institutions, etc.) providing there are no constraints on the use of the funds
Key indicators will be defined to include not only traditional fund performance indicators, but competitiveness and productivity indicators at the company, cluster, regional and national levels in Armenia
Contributors will receive regular communications on the performance of their investments.
Contributors will have the opportunity to sit on the Board of the fund, potentially through a system of rotating seats.
2. Financial Structure : 2. Financial Structure Initial Fund Size: $200mm to cover the first two sets of cluster.
Average of $50mm per cluster. The larger the cluster and the higher the potential growth rate, the bigger the allocation. This is aggressive but feasible given current levels for the first two cluster targets:
Software: 110 companies today with total estimated revenues $40mm and 2600 employees. The McKinsey high growth scenario reflects growth 25% per year or total revenues of $238mm by the year 2010.
Tourism: Total 2002 revenues of $80mm and 23,000 employees, with a high growth scenario expected level of $300mm by 2010 with 50,000 employees
Consider having a pre-set management fee (e.g. 2%) to cover the Fund’s operations, salaries and bonuses
Consider allowing contributors to direct their investments into specific clusters or types of activities
Ideally they would be encouraged to contribute to the general fund
Fund founders will need to decide what to do with the gains. Options include:
Create an evergreen fund in which gains are reinvested into existing or new clusters. This releases some pressure on ongoing fundraising.
Distribute gains directly to investors. This infuses a disciplining mechanism into the fund and a stronger incentive to make gains.
2. Financial Structure Fund Management Fee Benchmarks—Preliminary : 2. Financial Structure Fund Management Fee Benchmarks—Preliminary Mercer Management study of institutional asset management fees
December 13, 2004 report
2,000 firms surveyed in 8 regions around the world: UK, Europe, US, Canada, Asia, Japan, Australia and New Zealand
Main findings:
“Highest fees are charged in asset classes with the greatest potential to add value; emerging markets equity is the most expensive
Fees for equity strategies vary significantly between regions; Asia has highest fees while Canada has lowest
Fees are consistently higher for small cap equity products than large cap products”
Emerging market equity:
Small cap equity products are consistently more expensive than large cap equity products, and there is no discernible difference in fees between style (e.g. core, growth and value). In the US, for example, small cap fees range between 0.82% (82bps) and 0.88% (88bps) for a $50m segregated mandate. In contrast, large cap fees vary between 0.55% (55 bps) and 0.58% (58 bps) for the same size fund.
“Emerging markets equity is the most expensive regional asset class, with median fees for a $50m segregated mandate at 0.95%, or 95 basis points (bps), decreasing slightly to 0.9% (90 bps) for a $75m fund.”
3. Governance : 3. Governance The Board
10-12 Board members. Consider including major contributors as well as key outside experts on clusters and competitiveness (e.g. Michael Porter, Diana Farrell-McKinsey, etc).
Limited terms with possible renewal to ensure openings for others interested over time and to encourage Board Members to create value for the Fund or not be renewed
Minimal or no compensation for Board members, funded out of management fees
Consider having a separate Advisory Board without the ability to vote or make decisions, but enabling the Fund to have a flexible group of experts to consult on critical issues. Could include Government officials
Offices: New York and Yerevan. Consider offices outside Yerevan in a couple of target regions
CEO
Characteristics: high-caliber investment expert, philanthropically-minded, linkages with Armenia / some interest in Armenia
Compensation: Salary and bonus paid out of a set management fee at slightly below market rates for top-level fund managers in New York (arguably there are psychic rewards to this Fund as opposed to other more mainstream funds).
Conduct research to determine appropriate levels and structure of package
Must be willing to spend a lot of time in Armenia, particularly during the first years
Managers
Characteristics / Responsibilities
Number of managers: estimated 3-5 per cluster overseeing 5-10 investments
Compensation: Salary and bonus paid out of a set management fee
Conduct research to determine appropriate levels and structure of package
Must be located in Armenia
Support / Other staff as necessary
Functional Administrative staff (HR, IT, etc) based in NY with counterparts in Armenia when necessary
Communication / Transparency
Use outside, non-Armenian auditors
Publish / make available all non-competitive, non-confidential data
Maintain productive relationships with Government and other Development Players
Governance Fund Manager Compensation Benchmarks--Preliminary : Governance Fund Manager Compensation Benchmarks--Preliminary “RESULTS OF 1999 COMPENSATION SURVEY OF INVESTMENT MANAGEMENT PROFESSIONALS RELEASED BY AIMR AND RUSSELL REYNOLDS ASSOCIATES”
Key Findings
Investment management professionals employed by mutual fund organizations typically earn 24% more than their counterparts in insurance companies, banks, investment advisors and securities firms..
The 1999 median total compensation for investment professionals at mutual fund companies is expected to be $196,000, followed by investment counseling firms and securities broker/dealers at $185,000, insurance companies at $150,000, banks at $128,000, plan sponsors /endowments /foundations at $104,200 and lastly pension consulting firms at $95,000. The 1999 median total compensation for all survey respondents is expected to be $150,000.
Portfolio managers and analysts focusing on global or international investing generally earn more than their domestic counterparts.
In fact, the expected 1999 median total compensation for a portfolio manager of domestic equities is $153,000 and for global equities it is $211,000. In 1999, a portfolio manager of domestic fixed income is expected to earn $158,000, while a portfolio manager of global fixed income is expected to make $185,000.
Those serving institutional clients are generally rewarded with higher median total compensation than those working with a high net worth client base.
Bonuses are given on the basis of:
an organization's overall business performance (a factor in the bonus determination of 60 percent of those surveyed)
an individual's own investment performance (45 percent)
an organization's investment performance (42 percent)
an individual's business development performance (40 percent).
Debra J. Brown, an executive recruiter in Russell Reynolds Associates' Investment Management Practice, notes, "Incentive compensation is most significant at mutual fund firms and securities broker/dealers, accounting for roughly half of the median total compensation at these organizations. This finding is consistent with their pay-for-performance cultures and the trend towards greater differentiation in remuneration."
Investment Strategy Target Investments : Investment Strategy Target Investments Clusters
Clusters 1-2: Tourism, IT
Clusters 3-4: Banking, Jewelry
Clusters 5-6: Food Processing, Electronic and Precision
Clusters 7-8: Metals, Health Care
Grants
Non-company-specific cluster enhancing investments (e.g. training, consulting, market research and outreach, etc.) identified in the Strategy Development Phase
Business Environment: labor protection, private ownership, tax policy, management capability, cluster specific investments to benefit multiple companies, cross-cluster investments to boost productivity. Identified in the Strategy Development Phase.
Slide38 : 17 SECTORS OF ARMENIAN ECONOMY WERE SELECTED FOR INITIAL PRODUCTIVITY ANALYSIS Selection criteria: • Services and products marketable • Growth potential in productivity and/or employment • Potential for exports • Relative comparability with US Source: Armenia 2020/Mckinsey Report 17 Sectors covered: 5 Sectors not covered • Agriculture • Energy, gas and water • Education, science, culture, arts • Government and defense • Other manufacturing and services • Chemicals • Mining and minerals • Metals • Materials • Construction • Industrial machinery • High - tech equipment • Jewelry and diamonds • Food processing • Textile and apparel • Retail and wholesale • Tourism and restaurants • Banking and insurance • Health care • Communication • Transportation • Software and IT Services
Armenia 2020 Research Highlights Guiding Potential Investment Decisions: Employment and Labor Productivity of Selected Armenian Sectors*, 2001 : Armenia 2020 Research Highlights Guiding Potential Investment Decisions: Employment and Labor Productivity of Selected Armenian Sectors*, 2001 * Armenian statistics Yearbook 2001; IMF; U.S. Census Bureau; Team estimates Sectors Mining Share in employment
Total employment = 1,264 thous.
Percent Nominal labor productivity
USD per employee Real productivity at comparable prices
Percent of US sector productivity Metals Jewelry and diamonds Telecom Tourism and restaurants Construction Banking and insurance Food processing Textile and apparel Industrial machinery Electronics and precision equipment Construction materials Health care Retail and wholesale Transportation Total Average for
economy = 1,690 Average for
economy = 11.5% IT software Source: McKinsey Report for Armenia 2020
Armenia 2020 Research Highlights Guiding Potential Investment Decisions: Estimated Employment / Productivity Growth Potential of Selected Sectors : Armenia 2020 Research Highlights Guiding Potential Investment Decisions: Estimated Employment / Productivity Growth Potential of Selected Sectors Mining Negative (-5-0% CAGR) High (5-10% CAGR) Sector Employment growth potential* Low (0-5% CAGR) High (>10% CAGR) Real productivity growth potential* 1 Metals 2 Telecom 3 Tourism and restaurants 4 Construction 5 Banking and insurance 6 Food processing 7 Textile and apparel 8 Industrial machinery 9 Electronics and precision 10 Construction materials 11 Health care 12 Retail and wholesale 13 Jewelry and diamonds 14 Transportation 15 1 12 13 3 15 6 9 5 8 7 10 11 4 2 14 Low 0-5% CAGR) Medium (5-10% CAGR) 16 IT software 16 2003-2010 * Compared to current employment/productivity in the sector
Source: McKinsey Report for Armenia 2020. Based on team analysis; World Bank; UNDP
Armenia 2020 Research Highlights Guiding Potential Grants: Universal Productivity Constraints Across Selected Sectors : Armenia 2020 Research Highlights Guiding Potential Grants: Universal Productivity Constraints Across Selected Sectors Small domestic market Low High Medium-term adjustment capability* Low High The estimated impact of the constraints on overall productivity* 1 Unequal income distribution of population/ Low purchasing power
2 Country risk and cost of credit
3 Low salaries/ wages 4 Legal protection of labor 5 State ownership 6 Inefficient private ownership 7 Tax enforcement 8 Tax policy 9 Efficiency of public administration 10 Corruption/ Abuse of power 11 Expensive land transportation 12 Trade with neighbors 13 Competitive intensity 14 Privileges to businesses 15 Management capability 16 Labor trainability 17 1 17 12 13 3 15 6 9 5 8 7 10 11 4 2 19 16 14 18 Obsolete Assets Informality 19 18 * As a share of productivity gap
Source: McKinsey Report for Armenia 2020: 0% 3% 7% >20 years 5-10 years 10-20 years
Armenia 2020 Research Highlights Guiding Potential Grants: Required Microeconomic and Institutional Reforms : Armenia 2020 Research Highlights Guiding Potential Grants: Required Microeconomic and Institutional Reforms Microeconomic diagnostic focusing on major sectors of economy
Development of major initiatives in each priority sector
Development of major initiatives across all sectors of economy
Building public-private consensus on major reform priorities Remove regulatory entry barriers (e.g. telecom, aviation) to best practice companies
Eliminate formal and hidden privileges, reinforce competition and bankruptcy laws
Improve entry conditions in nascent sectors (e.g. non-bank financial services, high-tech)
Reform regulatory framework for natural monopolies (e.g. power transmission, airports, water, rail, mining)
Set and enforce standards in sectors with asymmetry of information issues (e.g. education, healthcare)
Improve standards in banking sector and drive towards further consolidation Reform the public administration
Reform tax, corporate and labor market regimes to reduce the burden on lawful players
Drive towards equal enforcement of simplified and less restrictive laws and regulations
Source: McKinsey Report for Armenia 2020
Typical Needs Resulting from Cluster Strategies : Typical Needs Resulting from Cluster Strategies Successful cluster processes will identify several needs to make the clusters competitive that the Armenia Competitiveness Fund could consider addressing:
Company Specific Support
Direct financing / investment for companies’ growth strategies
New start-ups
Management personnel / advisors (marketing advice, market research, financial management, etc., capable employees)
Cluster-specific Support
Outside experts, advisors
Marketing outreach such as participation as a cluster in international trade shows and cluster marketing materials
International networking
Training and research institutes
Infrastructure investments specific to the industry cluster
Cross-cluster Business Environment Support
General infrastructure investments that benefit multiple clusters (roads, airport, etc)
Legislation support
Relevant government agency strengthening (e.g. ADA)
Customs
International trade negotiations and trading partnerships
Trade delegations to neighboring countries
5. Support / Performance Measurement : 5. Support / Performance Measurement The Consulting Services division of the Armenia Competitiveness Fund Structure will provide needed support to client companies and help ensure the success of the investments
Investment funds can be earmarked for desired / necessary support
The investment banking arm will identify potential partners, mergers and acquisitions
The grant program will expedite critical cluster, regional and national level investments that are necessary, in coordination with the Government and other donors to avoid duplication of effort
Key performance indicators
Individual client company performance
Profitability and profitability growth
Total revenues and revenue growth
Labor productivity (revenues / employee)
Cluster performance
Profitability and profitability growth for client companies
Total revenues and revenue growth
Labor productivity (revenues / employee)
Regional / National performance
Profitability and profitability growth for client companies
Total revenues and revenue growth
Labor productivity (revenues / employee)
Consider early indicators prior to realization of growth and gains
Client satisfaction surveys
Dollars invested
Number of companies participating
New companies founded
New partnerships formed
Others
6. Interface with the Armenian Government : 6. Interface with the Armenian Government Coordinate Grant Program Activities with government to avoid duplication and maximize impact
E.g. the Armenian Development Agency (ADA) sponsors period trade shows, leads market development delegations abroad and other activities that Fund clients could benefit from
Discuss plans with key government officials before initiating the Fund to gain support and address any possible concerns
Consider including a government representative on the Board, or as part of an Advisory Board to ensure continued coordination and connection to the country’s emerging national vision and comprehensive economic development strategy
7. Interface with Other Development Players : 7. Interface with Other Development Players Foster productive relationships with relevant donors and NGOs working toward similar goals
UNDP is the local Donor Coordinator and holds periodic meetings of donors
Refer clients to donor programs that might provide additional support
E.g. CAPS program for specific clusters
Training programs
Outside industry experts
Others
Coordinate Grant Program Activities with donors to avoid duplication and maximize impact
Ensure transparency and openness to the degree possible
Agenda : Agenda The Challenge
The Case for an “Armenia Competitiveness Fund”
What is Competitiveness and How Is It Created?
Why a Competitiveness Fund Makes Sense Now in Armenia
The Vision for the “Armenia Competitiveness Fund”
Critical Design Issues for the Armenia Competitiveness Fund
Discussion and Recommendations
Backup: Lessons Learned from Other Initiatives
Selected Armenian Initiatives
Selected non-Armenian Initiatives
Izmirlian Foundation : Izmirlian Foundation Est. 1994 by family of Swiss-Armenians
Headquartered in Geneva
Mission: Improving the lives of Armenians throughout the world
Izmirlian-Eurasia Small Business Loan Program
In 1999 Izmirlian contributed $3mm to existing Eurasia program
Eurasia managed the program
Up to 2 yr loans and $125k for Armenian SMEs
Loans made in partnership with 3 Armenian banks which changed over time
Rate set at 15%: Eurasia received 5%, bank received 10%
Prospective borrowers submit application jointly evaluated by Eurasia and bank
Borrowers subjected to monthly or quarterly monitoring by both bank personnel and Eurasia employees
Banks and the Izmirlian shared the non-payment risk --50% each for loans made with Izmirlian funds
Results by year-end 2003
Less than 1% of loans past due
Less than 5% of loans written off
20% of loans made to repeat borrowers
Noted for contribution to the poultry industry
Changes in 2003-2004: Finance Company
The 2 foundations planned to establish a finance company owned 50% by each
Bypass banks: “At some point banks have to . . . make their own loans and not use our money.” Black Sea Trade and Development Bank – Izmirlian Foundation Joint Finance Facility
In 2003 Izmirlian and BSTDB each contributed $2mm to launch a joint finance facility for Armenian SMEs
Provide loans in dollars or euros for capital expenditures and working capital requirements
$125k – 500k
Maximum term 5 years
12% interest rate (vs. 18% average lending rate in-country)
Financial returns to Izmirlian used to support philanthropic activities in Armenia
Netherlands Management Cooperation Program audited companies and offered technical assistance through retired executives Source: Gillespie and Andriasova, “Diaspora Support for Business Development in Armenia”
Lincy Foundation Loan Programs for Armenia : Lincy Foundation Loan Programs for Armenia Foundation est. by Kirk Kerkorian, an Armenian-American billionaire and philanthropist
Late 1990s visited Armenia and was asked by the government to assist the homeland
In 1998 a loan program to assist SMEs was signed by Government, Central Bank and Lincy Foundation
$100mm 6 year loan without interest to government from Lincy
Government proposed and administered the original organization of the project
Government would loan to Armenian banks at no more than 3% per annun
Banks would provide qualified businesses with loans
$100k - $1mm loans at no more than 15% interest rate
Firms had to be majority-owned by Armenian citizens
Government created a project implementation office and a special commission to approve loans
No Lincy employees involved but frequent Yerevan – Los Angeles communication
When commission approved a loan, the request would be presented to Lincy to assure projects met criteria est. by US IRS (no arms or hazardous materials, environmentally safe production, etc)
2000-2001—Government went back to Lincy concerned that it was too much money. New MOU
$95mm direct grant for infrastructure
$45mm SME loan program
$30mm for loans or equity investments in majority foreign-owned companies—bypassed banks and government was in charge of loaning this money directly
Results
$45mm SME loan program
$20mm of the $45mm had been loaned to SMEs / 44 projects--Cannery, paint production facility, case-iron melting facility, green-house
Government requested, and Lincy agreed, that remaining $25mm be allocated to infrastructure
“ . . . Seems like Mr. Kirkorian trusted the money to the president and the government . . . “
$30mm foreign investment program
received 35-40 business plans / 4 approved by Government
no loans or equity investments were ever made
discontinued and reallocated to infrastructure
Source: Gillespie and Andriasova, “Diaspora Support for Business Development in Armenia”
Armenian Business Corporation : Armenian Business Corporation 1991 Government invited 600 Armenian businesspeople from Diaspora
Est. Armenian Business Forum
Use members to mobilize charitable funds for Armenia and seek foreign investors
“We were working with the local government knowing that only 20% of the humanitarian assistance was reaching the people. ABF tried to bring investors . . . None of them succeeded. They all lost their shirts and returned because of strong Mafia thief organizations.” ABC: 1994-1999
1994 President asked for help to pull Armenia out of depression
ABF created Armenian Business Corporation (ABC)
ABF became inactive
ABC registered as a for-profit ordinary joint-stock company
32,000 shares / total capitalization $320k
Participants were all members of ABF and came from 17 countries
Goal: unifying the efforts of the Diaspora to assist the development of private business in Armenian and improve the social climate in the country
Activities
Loans to local businesses of which many went bankrupt leading to bad loans
Shareholder in 2 privatized SOEs ABC: 1999-2003
1999 desire to liquidate: full time managing bad loans
Shareholders exited at small loss, down to 821 shares
Hovsep Seferian new president
New business model
Businesses willing to undertake an equity JV in which ABC was majority owner
“if they want to steal, they steal their own funds.”
When approached for financing ABC would:
Determine if there was a market
Site inspection
Business plan approved by managing committee
New LLC established to implement project
Day to day business left to minority partner w/recognition that ABC could change management
2001 listed on Armenian stock exchange
SEC presented obstacles but ABC persevered
By end 2003:
10 employees and 251 owners
Assets exceeded capitalization, company finalizing application to issue new shares to be sold in Armenia and Diaspora at a premium
7 JVs (fruit / vegetable processing, gas stations, potato production, stone mining, law office Source: Gillespie and Andriasova, “Diaspora Support for Business Development in Armenia”
Armenian SME Investment Fund w/ IFC : Armenian SME Investment Fund w/ IFC May 2000 IFC commissioned feasibility study through US Trade Development Agency to assess demand for long-term capital by Armenian SMEs
Concluded long-term financing needs were not being met
IFC sponsored creation of an investment fund to provide adequate financing for SMEs in Armenia
IFC would play key role as leading investor up to $5mm
Armenian diasporans and others interested would raise additional $15mm
Approved June 2002
Fund would be managed by private investment bank in NY owned by Diasporan
Provide equity and quasi-equity to qualified SMEs
JVs with multinational partners, particularly businesses with strong diaspora connections
Investments in existing Armenian SMEs needing capital to expand
Seek companies with products and services for export
$15mm target never reached Source: Johnson and Sedaca, “Diasporas, Emigres and Development”
Eurasia Foundation : Eurasia Foundation Est. by US Govt. in 1993, primarily funded by USAID; subject to regulations est. by the US OMB and USAID
An independently managed grant and loan organization with offices in the 12 NIS
Mission: help establish and reinforce democracy and market-driven economies in the NIS
1995 Small Business Loan Program to foster entrepreneurship in Armenia and Ukraine
Armenia Small Business Loan Program
Provide long term working capital and capital expenditure financing to new and existing Armenian businesses
Foster dev. of small business lending capacity in Armenian banks by introducing a proven lending methodology that can support small businesses and offer low loan loss ratios
1995-1999: $3.8mm to 133 SMEs, 900 new jobs
In 1999 renamed Izmirlian-Eurasia Small Business Loan Program
Recognition of $3mm grant from Izmirlian
Largest grant outside the US Govt. contribution; doubled the program size
For program description see Izmirlian Foundation overview Source: Gillespie and Andriasova, “Diaspora Support for Business Development in Armenia”
Other Future Options Discussed in the Literature : Other Future Options Discussed in the Literature Pan-Armenian Development Bank
Goal: est. investment fund of mid-large scale Diaspora investors
Managed by experienced Diasporans
Take equity stake in existing or new companies
Identified challenges
Investor requirements of a sound investment climate
Potential resistance from domestic actors
Lessons from other experiences
Armenian SME Investment Fund: timing is not right
Nature of private-public partnership must be thought through
Other issues
Strategy
Coordination with other donors, including MCA
Armenian Sovereign Diaspora Bonds Program
Examples: Israel Bonds (success); Bangladesh, china, India, Lebanon, Pakistan, Philippines
Pros:
Possibility for a diaspora or patriotic discount (Grigorian and Gevorkyan)
Longer maturity funds (Grigorian and Gevorkyan)
Reduction of rollover risks (Grigorian and Gevorkyan)
Grave consequences of default or mismanagement represent self-imposed mechanism to adopt sound economic and public governance policies (Grigorian and Gevorkyan)
Cons: Need ability to market the bonds
Remittance-backed Bonds
Example: El Salvador—Banco Cuscatlan: Securitized cash flows from remittances
Pros:
Cons: Levels of remittance flows are not guaranteed; counter-cyclical foreign exchange flows (more remittances when times are bad)
Source: Gevorkyan and Grigorian, “Armenia and Its Diaspora: Is There Scope for a Stronger Economic Link?”, Johnson and Sedaca, “Diasporas, Emigres and Development”
Agenda : Agenda The Challenge
The Case for an “Armenia Competitiveness Fund”
What is Competitiveness and How Is It Created?
Why a Competitiveness Fund Makes Sense Now in Armenia
The Vision for the “Armenia Competitiveness Fund”
Critical Design Issues for the Armenia Competitiveness Fund
Discussion and Recommendations
Backup: Lessons Learned from Other Initiatives
Selected Armenian Initiatives
Selected non-Armenian Initiatives
Enterprise Ireland and Its “Competitiveness Fund” : Enterprise Ireland and Its “Competitiveness Fund” “Enterprise Ireland” is the Irish Government agency responsible for the development of Irish industry.
Core Mission: “to accelerate the development of world - class Irish companies to achieve strong positions in global markets resulting in increased national and regional prosperity.”
5 main areas:
Existing target sectors: work with individual client companies in targeted sectors providing access to knowledge, expertise, and resources for change (current sector focus: Food, Software and International Services, Industrial Products, Engineering and Electronics, Lifesciences and Chemicals, Construction, Paper-Print-Packaging, Consumer and Timber)
Groups of companies: facilitate linkages, build networks, provide sectoral leadership, and shape business infrastructure
Start-ups: High priority given to accelerating the number of new, high potential start-ups
New Sectors: Actively encourage the emergence of new business sectors (Software and Services, Digital Content, Biotech, Photonics, Nanotechnology, Functional Foods,
Regions: work with specific regions to develop existing enterprises, increase the level of start-ups and enhance the business environment
Total income 2003: 235mm euros (of which over 90% comes from Parliamentary grants and 6% from the agency’s own resources)
The agency established a “Competitiveness Fund” in 2003
The Objective: to help older SMEs in traditional sectors to upgrade and modernize their operations and to become internationally competitive measured through gains in output and productivity
Budget: €10 million. Has supported 97 enterprises
Fund is open for applications every two months. Available grants range from €150,000 to €225,000 (25-45% of eligible costs) depending on the company's location and are not available to firms which have developed major plans for funding over the past three years
Funding awarded on a competitive basis for projects that “substantially contribute” to an improvement in competitiveness
Activities targeted: achieving World Class Manufacturing status, supplier development programs, management and training of staff, employment of a key person, capital grant for new machinery/ automated machinery
Black Sea Trade and Development Bank (BSTDB) : Black Sea Trade and Development Bank